Trade Deficit An Issue Baker Warns U.s. Facing Recession

TOKYO — Treasury Secretary James A. Baker pressed America`s case for greater economic expansion in Japan and West Germany by warning Saturday that a ``politically unsustainable`` trade deficit threatens a U.S. recession.

Baker, briefing reporters on the eve of the 12th economic summit, indicated that the U.S. rebuffed Japan`s pleas for joint action to stabilize the value of the dollar, which has fallen dramatically against the yen and created political problems for this country`s leaders.

Baker`s comments sharpened the dispute between the U.S. and its allies over how to correct America`s $150 billion trade deficit, the source of rising protectionist sentiment in Congress.

It put economic growth at the top of the summit agenda from the American standpoint.

Hope appeared dim, however, that the U.S. will get its wish for commitments by its allies for accelerated economic expansion.

West Germany is resisting the U.S. call for stronger growth in its domestic economy, saying its current projected growth of 3.5 percent is sufficient despite a 9 percent unemployment rate.

Japan`s leaders say they support moves to awaken its sluggish economy by persuading its people to buy more imports but paradoxically argue that the yen has already been strengthened too much. A stronger yen makes Japanese imports more expensive in the United States.

``A trade deficit in the $100-billion range, which is what, frankly, we think the United States` trade deficit would be after 1987, moving into 1988, is a politically unsustainable level,`` Baker said.

This deficit cannot be corrected merely by moving the dollar lower against other currencies, he said, but requires a higher rate of domestic growth by U.S. allies.

``So if there`s no movement with respect to economic fundamentals, that is, increased growth, the only other way to deal with it, perhaps, would be a recession in the United States, which, of course, is unacceptable to everybody.``

Baker said he wasn`t saying a recession would necessarily be the result of the failure of West Germany and Japan to go along with American wishes.

But he clearly sought to get across the message that it was a possible outcome.

A recession could occur if a sharply falling dollar caused the Federal Reserve Board to drive up interest rates in order to restore confidence in the currency.

Baker used passage of a trade bill before the House Ways and Means Committee to put pressure on West Germany and Japan, saying the trade restrictions enable the U.S. to tell the other six countries here ``I told you so.``

He said that the U.S. told its allies last fall that ``protectionism would be returning in full flower in the spring`` if they failed to improve their economies, reducing their trade surplus with the U.S.